Revenue management for durable goods using trade-ins with certified pre-owned options

The economics research suggests that firms can use trade-ins as a revenue management device for price discrimination between new and replacement buyers of durabprle goods. Offering different prices to different groups of customers creates a market segmentation effect. This study examines such an effect by considering trade-ins and certified pre-owned options for a durable goods firm, where certified pre-owned (CPO) represents the used goods market generated from the return flow of trade-in transactions. The optimal pricing and/or trade-in rebate is determined, and the strategic choice between the two options is examined. An analytical model is developed that incorporates the key durable goods features into model formulation, specifically the deterioration rate (or durability in a reverse measure) and the variation in quality of the used goods. Our research findings indicate that: (i) the magnitude of trade-in rebates increases with the deterioration rate and quality variation; (ii) the segmentation effect outweighs the cannibalization effect when the deterioration rate is moderately high; (iii) the strategic choice of trade-ins and CPO options is critically dependent on these two features; and (iv) the majority of profit improvement is generated from trade-in provisions, although the CPO option can serve as a second profit boosting device.